Different Strokes For Different Folks

It would appear as though Central Banks are breaking with the narrative set by their respective politicians. And as we know politicians are full of hyperbole to the extent that they believe they can significantly influence markets. That seems to be the issues facing central bankers.

The narrative from the Fed is one of caution and under their modelling, growth rates rise to about 2.5% at the most extreme point but within their forecasts growth appears to be languishing around 1.5% to 2% and that’s before any rate hikes. Compare that to the Trump Administration that says they can easily achieve 3% through their fiscal stimulus. The problem being they have no plan and don’t have anyone to write the plans. The Fed is being cautious however if the Fed is right then under a Trump Plan the U.S. would suffer a significant debt burden. To emphasise the point so far, this month “employment data, vehicle sales, durable goods orders, consumer prices and retail sales have all come in below economists’ expectations”. (Bloomberg) People, politicians are being simply way too optimistic and fail to understand that everything takes time.

The same could be said for the BOE. The Conservatives are under the mistaken belief that the economy can grow without knowing what the Brexit outcome will be. Several BOE Board Members have stated they are tiring of inflation and could shortly raise rates. Much of this inflation however is due to the shock of Brexit and a weakening currency.

Whilst the narrative continues the real issue for many is wages growth. As inflation has fallen, and competition increases the margin for operators is thinning. If the business cannot increase productivity and sell more stuff then wages cannot increase otherwise the business may no longer exist.

The problem for economists is that today very few report GDP per capita what is normally reported is GDP growth and this is where the divergence is huge. Politicians like to report GDP growth because by definition GDP grows. This is even more relevant in the U.S. where economic surprise has tended to be on the downside rather than the upside. The U.S. is still languishing and rates are rising, this makes for an interesting conundrum.

GDP growth will come more into focus as central bankers are questioned on their positions regarding the direction of rates and as politicians become more desperate to show that they have some impact on growth.

On the day, equities were weaker. At the heart of the weakness was the technology sector. This is of some concern because much of the race to record highs was driven by the technology sector. If the technology sector was excluded the equities market would be a lot lower. The Dow was down 0.07%, the S&P was down 0.22% and the Nasdaq was down 0.47%. There are some concerns about rising interest rates. Interestingly on a quiet day the Vixx jumped to 11.

Bonds suffered on the day, UK 10-year gilts weakened to close at 1.085% up some 6bp, the France 10-year and bund followed suit weakening some 3 bp. The 10-year OAT closed at 0.76% and the 10-year bund closed at 0.33%. The U.S 10-year treasury closed at 2.164% up 2.6bp. The curve was bit topsy turvey with the 2/30 stable at 143.20, the 10/30 in 2 bp to close at 162.20 and the 2/10 out 1.8bp to close at 80.90. The probability of no rate hikes between now and 31 December 2017 is now at 60% (Fed Fund Futures).

Commodities were weak. WTI continued its fall closing 0.6% weaker. The fall is largely attributed to a build-up in gasoline inventory in the U.S. It is expected that U.S. shale oil producers will be tested once again with oil sub $45. Gold fell 1.7% its largest fall since Dec.15. Copper fell 0.7%. Nucor forecast a weak 2nd quarter as demand for steel continues to fall. The U.S. and Mexico are getting close to finalising a sugar pact that resolves a year -long dispute before a new trade deal is renegotiated. (Sugar growers are heavily subsidised in the U.S.)

What to watch? The BOJ finishes its two-day meeting today so watch for any commentary on inflation. Special counsel Mueller is now investigating Trump over alleged interference in the probe of Mike Flynn. We really don’t need anymore distractions. And it appears that whilst the U.S. has been developing apps to get your pizza order to you at home quicker than the next guy the Chinese have developed a quantum network Such a system is un-hackable and is a significant technological leap if true.

The Aussie Market Today

It’s Friday markets have generally been steady and we are closing rapidly on the end of month and end of financial year. I expect to see some volatility caused by profit taking, taking losses to offset gains and in other words a choppy environment for the next 2 weeks.

Bonds will be marginally weaker on the day and I expect equities to be steady. The real driver is the AUD and that has had a good few days. There have been some reasonable inflows and this has helped the rally in equities and bonds.